The Reserve Bank has continued to shake up the status-quo, cutting the official cash rate by 25 basis points for the second consecutive month in a bid to stimulate the economy.
Sitting at 1.50% just a couple of months ago, the already record-low cash rate has now fallen to an unprecedented 1.00%, down from 1.25% in June.
Although expected, a rate cut wasn’t as much of a certainty as it was a month prior, as there was a 100% expectation of a June cut occuring.
Nonetheless, markets had already priced in a 25 basis point cut at 77%, according to the ASX, while 29 of the 41 economists surveyed by Reuters expected a cut.
The Reserve Bank had already indicated an easing bias prior to this decision, and according to RBA Governor Philip Lowe, this decision has been made to support employment growth and provide greater confidence that inflation will hit its target.
“Conditions in most housing markets remain soft, although there are some tentative signs that prices are now stabilising in Sydney and Melbourne. Growth in housing credit has also stabilised recently,” Mr Lowe said.
“Demand for credit by investors continues to be subdued and credit conditions, especially for small and medium-sized businesses, remain tight.
“Mortgage rates are at record lows and there is strong competition for borrowers of high credit quality.”
Attention turns to mortgages again
CoreLogic research Analyst Cameron Kusher said the decision to cut interest rates again from the RBA is an attempt to support the economy and has very little to do with the housing market.
“The likelihood of an interest rate cut had been rising throughout June, particularly since the weak GDP reading in early June and following RBA Governor Phil Lowe’s speech which indicated that a single 25 basis point cut to rates (which was delivered last month) was unlikely to shift the path that we are on,” Mr Kusher said.
“The ongoing slowing of the rate of decline in dwelling values throughout 2019 and the recent uptick in Sydney and Melbourne dwelling values, would likely have reduced concerns of further wealth erosion from housing.
“Furthermore, the 25 basis point cut in June along with the cut today and the likelihood of reduced serviceability buffers from APRA are likely to be further positives for the housing market and encourage an ongoing gradual levelling in the housing downturn nationally.”
Mr Kusher also said there’s “no doubt” attention will again turn to mortgage rates and whether the full 25 basis point cut will be passed onto customers.
“Our expectation is that banks will be holding back on passing on the full cut as they seek to balance out mortgage rates with deposit rates and protect net interest margins,” he said.
Why two cuts?
Josh Callaghan, General Manager at REIQ, said it’s clear why the RBA has decided to cut rates again, but is of the opinion there should have been a single, 50 basis point cut last month instead of two consecutive 25 point cuts.
“It seems like the RBA is chasing the economy down to new lows although it must be said that with a lack of any other mechanism being used to halt the steady decline, they’re caught between a rock and a hard place,” Mr Callaghan told Savings.com.au.
“Like the last rate move, this one is unlikely to have any real impact on the economy.
“Annecdotally, access to credit is still tight in the market which means that further cuts are unlikely to spur on a property price recovery.”
Treasurer to banks – “we expect rate cuts”
Only two of the big four banks – Commonwealth Bank and NAB – passed on the full 25 basis point rate cut to customers last month, something that drew the ire of the Treasurer Josh Frydenberg, with ANZ in particular copping a lashing.
And ahead of what we now know is another rate cut, Mr Frydenberg again warned the banks further interest rate reductions were expected.
“We do expect the banks to pass on in full to the Australian people the benefits of sustained reductions in their funding costs,” the treasurer told reporters in Canberra on Monday.
Roughly 80 institutions cut home loan interest rates in June, but as Mr Kusher said, it is unclear whether they will choose to do so again.
Is this the last cash rate cut?
Probably not, if some of the nation’s top economists are to be believed.
Chief economists from major institutions like Westpac, NAB and Commonwealth Bank all predicting the cash rate to fall again before the year is out.
This would leave the cash rate as a previously-unthinkable 0.75% before Christmas, and would likely see a surge in mortgage activity as more rates drop below that magic 3.00% p.a. mark.